All transactions for private businesses involve intense negotiations in an unstructured forum – no common rules (per se), no appeal process, no fixed timetables, personalities and a number of sometimes inexperienced participants. The better one understands the objectives of all participants, the more opportunity there will be to find creative solutions and successful resolution of different points of view.
Fundamental to every set of negotiations is that they be carried out with thorough preparation, honesty, integrity and good faith. In our view, these are the cornerstones of successful negotiation. To the extent that honesty and good faith do not exist, the proposed transaction should not be completed, given the potential costs of ‘failed’ acquisitions.
Price is not the only part of the transaction that must be negotiated
Some of the issues in an acquisition that normally require negotiation are set out below.
- What is being purchased? Assets or shares? Any assets or liabilities to be excluded?
- Price – is there an asking price? Has the vendor put forth some justification for the asking price? Does the vendor’s price expectation include the benefits of synergies, and if so, does the purchaser have access to such synergies?
- Consideration – does the vendor expect an all cash deal? If not, what are vendor expectations as to VTB and terms (rates, time period, etc)
- Timing – when is the transaction expected to close? Is there a gap between signing the agreement of purchase/sale and closing? Is there a preferred closing date, given existing year end, tax planning opportunities, etc
Representations and warranties– are they being structured on a ‘best knowledge’ or an ‘absolute knowledge’ basis?
Indemnification – how will compensation be paid if the warranties and representations turn out to be invalid or are breached? Is there a ‘cap’ on the amount of exposure of the vendor?
Contracts – in many cases, management contracts and non-competition agreements are signed as part of the transaction. The management contract will define the compensation, duties and responsibilities of the vendor following the transaction. Non-competition clauses are very common in private company transactions, and issues of survival period, geographic restrictions and business exclusions must all be negotiated.
All of these issues (and more) have to be negotiated during the course of a deal. Some must be agreed to at the letter of intent stage, while others can be negotiated during the formal legal agreement stage.
In our experience, the tendency for some transactions to ‘drag on’ during negotiations is a critical issue that must be managed. Such delays can be caused by many factors, such as access to appropriate financial information, that are sometimes the ‘fault’ of one party or the other (or not!). The parties can become ‘deal weary’, yet still believe in the desired outcome of a successful closing; external advisors can play a significant role in managing against this risk and ensuring a transaction keeps moving towards completion.